Multifactor productivity (MFP) growth in Manufacturing was negative over the most recent complete productivity cycle (2003-04 to 2007-08), in contrast to the positive growth in the previous cycle. This large decline was atypical for Manufacturing, and since then MFP has continued to decline (although more slowly).

Manufacturing's MFP decline was a major contributor to flat market sector MFP.

There is no overarching systemic reason for the large decline. Rather, various subsector-specific factors, such as lags between investment and output; unmeasured increases in quality; and lower capacity utilisation all contributed. Some factors reflect temporary responses to changing competitive conditions.

Petroleum, coal, chemical and rubber products (PCCR), Food, beverage and tobacco products (FBT), and Metal products (MP) collectively accounted for two-thirds of the decline between cycles. Influences on each subsector were diverse.

PCCR output declined in absolute terms over the most recent cycle (after growing over the previous cycle), and yet there was a large increase in capital investment.

Petroleum refineries invested to meet new environmental standards, but the improved fuel quality is not fully reflected in the output measure, and thus in MFP. Value added per unit of output also declined, as greater volumes of feedstock and refined fuel were imported in response to reduced output from domestic oilfields.

For plastic products, increased production by overseas firms with lower input costs and the appreciation of the Australian dollar led to strong import competition. Domestic production declined, leading to underutilised capacity. Higher demand for fertilisers and explosives led to very large investments to expand chemical production, but there was a lag before output increased.

Slower output growth was associated with a decline in exports and a loss of domestic market share for some products - reflecting input cost pressures, appreciation of the Australian dollar, and, in cases such as wine, drought.

Consumer preferences also drove changes in the composition of output that increased the input intensity of production - for example, there was growth in smaller scale, more labour intensive, non-factory bakeries.

But the decline in MFP in FBT may have been overstated due to challenges in measuring improved output quality and reductions in the capital stock.

Metal products was different, with faster output growth and even faster input growth.

Metal products was responsible for most of the capital growth in Manufacturing, largely to expand alumina refining capacity. However, the inevitable lag between investment and ensuing output led to lower measured productivity.

The MFP decline in Manufacturing has slowed in the current incomplete cycle. MFP growth in PCCR and FBT remains negative and it is marginally positive in MP.

Background information

Shiji Zhao (Assistant Commissioner) 02 6240 3342

Decline in productivity in Australian manufacturing

Although economic conditions over the last decade have been difficult for the manufacturing sector, its real value added remains higher than at the turn of the century.

Over the long term, investment in manufacturing has risen, but nevertheless hours worked (and therefore, broadly, jobs) have declined. Manufacturing's multifactor productivity - a measure of innovation, technology and other factors affecting productivity - has been declining since 2003-04.

A Staff Working Paper, Productivity in Manufacturing: Measurement and Interpretation, by Paula Barnes, Leo Soames, Cindy Li and Marcelo Munoz unpacks the ABS estimates of multifactor productivity for manufacturing. The authors found that there was no overarching systemic reason for the decline in manufacturing's rate of multifactor productivity growth to -1.4 per cent a year over the last complete productivity cycle (2003-04 and 2007-08), compared with 1.3 per cent a year over the previous cycle (1998-99 to 2003-04).

However, three of its subsectors - Petroleum and chemicals, Food and beverages, and Metal products - collectively accounted for two-thirds of this decline between cycles.

In these three subsectors, there was a diverse range of influences, including:

a lag between new capital investment and the output from that investment

additional investment in petroleum refining to meet new environmental standards improved the quality of outcomes but did not raise output, and the benefits of which are not reflected in productivity measures

consumer preferences, for example, significant growth in smaller-scale bakeries that use more labour-intensive processes

reduced capacity utilisation in response to factors such as the appreciation of the Australian dollar and changing competitive conditions.